Mexico’s state-owned oil producer, Pemex, has long
enjoyed one of the largest followings in the dollar market
among LatAm issuers. In 2012, it took advantage of the
country’s improving economic outlook, while
providing emerging market investors and crossover buyers around
the world with access to the Mexican story.

With an expansive capital expenditure programme targeted at
exploration and oil production, Pemex has had to make frequent
visits to the debt capital markets while looking for novel ways
to tap sources of funding that offer cost savings versus
dollars.

It capped off the final months of 2011 with the
region’s first cross-border bond sale in more than
a month, making an opportunistic retap of its 6.5% 2041 bonds
that allowed it to raise $1.25 billion. The state-owned oil
producer with the support of a $300 million reverse-inquiry
priced at the tight end of the US Treasuries plus 320 basis
points guidance, to yield 6.339%. BNP Paribas and Deutsche Bank
managed the sale.

In April, Pemex became the first Latin American credit to
issue a bond in Australian dollars, which had been discussed as
a possible pool of liquidity by other borrowers in the region.
The state oil company raised A$150 million ($156 million)
priced at 99.715, with a 6.125% coupon, to yield 6.193%, or
mid-swaps plus 195 basis points, the tight end of mid-swaps
plus 195-200 basis points guidance, and was seen pricing at 25
basis points inside Pemex’s dollar curve. HSBC
managed the transaction.

The deal followed a 300 million Swiss franc ($326 million)
transaction in March 2012 which priced at 100.823 with a 2.5%
coupon to yield 2.371%. Credit Suisse managed the sale, its
fifth ever in the currency and first in two years. Pemex has
been one of the region’s most active borrowers in
currencies other than dollars, and 2013 should be no
different.

"We would certainly look at the euro[-denominated] market as
we do every year and we would look at some currencies in Latin
America," says Mauricio Alazraki, Pemex’s treasury
director. "The swap to dollars makes it difficult to structure
those trades, but Pemex could turn to South American currencies
such as Peru or Colombia which might make sense in our funding
program."

Pemex later returned to the dollar market during a positive
market environment in June following the Greek elections. A
$1.75 billion 32-year bond mimicked the Mexican sovereign in
providing a long-dated security that can be retapped for two
more years, getting a 5.50% coupon that was one of the
lowest-ever for a LatAm corporate long bond. It priced at
99.552 to yield 5.53%, or US Treasuries plus 280 basis points,
with investors coming in for $6 billion.

It later took advantage of market conditions to add $1
billion to the 2044 in October, to the tune of more than $3
billion in orders, as it brought the yield down to 4.824%.
Barclays, JPMorgan and Santander managed the first sale, and
Deutsche Bank, Goldman Sachs and HSBC the retap. An additional
retap this year is possible, Alazraki says.

Taking pesos global

The Mexican sovereign has long appealed to bond investors
for the ease with which they can access their local curve in
addition to buying internationally registered bonds. It was
only a matter of time until the country’s top
corporate joined the fray.

Following the Peruvian issuance of global depositary notes
(GDNs) offering international buyers access to local currency
bonds, Pemex became the region’s first –
as well as the world’s first – corporate
to use the structure. In December 2011, it sold 10 billion
pesos ($734 million) in 10-year notes, doubling the intended
size after receiving 13 billion pesos in orders.

In addition to matching its largest ever peso-denominated
size to date, the 7.65% yield meant an Mbonos plus 135 basis
point spread in line with its local curve.

It was Pemex’s largest ever single tranche
local deal and at the time the lowest-ever fixed rate pricing,
according to Morgan Stanley, the structuring agent, and
bookrunner along with HSBC and Santander.

Pemex launched the deal on a Wednesday afternoon in the US
to incorporate international demand, before opening books in
Mexico on Thursday to account for the local demand. At least
60% of participation came from foreign investors who generated
about 5 billion pesos in demand for the 144a/RegS GDNs, with
another 8 billion pesos coming from locals for the
GDN’s underlying certificados
bursátiles.

Similar to an ADR for equities, a GDN is a negotiable
international instrument issued through a depositary bank
evidencing ownership of a local debt instrument, allowing
international investors to participate in the local debt
markets. It is settled through DTC, Euroclear and Clearstream,
eliminating the arbitrage problem of having two local
curves.

The GDNs can be exchanged for the underlying securities at
any time, and trade, settle, and pay in dollars linked to
pesos. Alazraki says Pemex would like to tap the domestic
market more frequently, likely with the GDNs. However, the
titulos de crédito extranjeros securities inaugurated by
América Móvil in November offer another way to
place local debt with foreign buyers without the need for two
separate securities.

"Titulos de crédito extranjeros is a great program
and we have to see if that is a way to go or to work on our GDN
format and provide it with more liquidity," says Alazraki.
"There are similarities in terms of documentation. One of the
advantages of the GDN is that it is easier to identify the
amount to withhold. Obviously what América Móvil
did was a great transaction."

Ex-Im first

Pemex has also turned to the US market for additional
funding diversity, as well as rock-bottom costs. The $1.2
billion it issued under a program guaranteed by the US
Export-Import Bank was the first time a LatAm issuer had issued
such a bond for purposes outside of aviation funding.

The first transaction in June was increased to $400 million
from an expected $250 million and oversubscribed more than two
times, with asset managers and insurance companies leading the
demand. The issuer got a 2.0% coupon and yield for the 2022.
Its previous 10-year dollar bond had come at 4.98% in
January.

The strong reception moved the state-owned oil company issue
to again two days later, raising another $400 million. The
second deal tightened the cost to 1.95%

In the first June deal, 45% of the investors were new to
Ex-Im bonds, with the rest repeat accounts. The next series saw
77% overlap with accounts invested in the first series. Most of
the demand came from asset managers, banks and insurance
companies. Crédit Agricole, Goldman Sachs and JPMorgan
managed the two sales.

"Pemex was the first of its kind," says Jia Shan, vice
president of EM DCM at Goldman Sachs. Shan says the series of
deals saved Pemex money, versus taking out a direct loan from
the Ex-Im Bank.

Pemex finished off the $1.2 billion program with another
$400 million sale in July. The deal got a 1.70% coupon and
counted on about 84% of the June buyers. Proceeds were
earmarked for payments for US goods and services imports Pemex
and its subsidiaries buy from US suppliers.

Pemex had raised $6.03 billion through December of last
year. It capped off its borrowing by raising 25 billion pesos
($1.92 billion) in Mexico’s domestic bond market,
in a three-tranche offering that was the issuer’s,
and possibly the country’s, largest-ever domestic
sale.

A 11.5 billion peso 2017 floating-rate bond priced at TIIE
plus 18 basis points and drew 1.5 times demand. A 10 billion
peso reopening of the 7.65%-coupon 2021 fixed-rate bonds came
at a 6.52% yield, and attracting 1.5 times demand. The retap
doubles the outstanding size of the bonds sold in the GDN
offering. The issuer elected not to offer the bonds to
international buyers this time. Finally, it issued a 3.5
billion peso 2028 UDI-denominated tranche paid 3.02%. Banamex,
BBVA Bancomer, HSBC and Santander managed.

Pemex has set a target of borrowing $9.8 billion for 2013,
though that remained to be approved as of mid-December. If
approved at this level, the state-owned oil company plans to
borrow about $4 billion internationally, mainly through the US
dollar market, though it will also watch euros, Swiss francs
and other currencies for opportunistic taps. A retap of the
2044s and returns to GDNs or Ex-Im funding are likely. On the
domestic side, between $2.5 billion and $3.5 billion-equivalent
is likely. LF

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